When discussing the trade cycle theory and accompanying business cycle theory, I believe Austrians place too much importance on the lengthening of the time-structure of production as the primary avenue to which newly injected credit is invested in (or malinvested in if the credit was Fed-induced). Certainly a lengthening of the structure of production is one way the new funds can be invested, but to do so the borrower must come up with an idea for how said lengthening will be able to achieve the same amount of output for less input. The requisite ingenuity only occurs sporadically and is not a function solely of investment.
For example, we’re all familiar with the standard Robinson Crusoe scenario that Austrians throw around often. Crusoe catches fish with his bare hands. Then he accumulates savings that allow him to lengthen the structure of production by investing time, labor, and resources into constructing a fishing net over (say) a 3 day period while he sustains himself off his previous savings. With the net he can catch many more fish in less time which allows him to acquire enough fish so that he can spend the next (say) 2 weeks lengthening the structure of production further by constructing a boat that will allow him to go out fishing deeper in the water where he can catch even more fish in even less time. Now he has even more savings, etc.
It is of note that every lengthening of the structure of production was accompanied by ingenuity. First Crusoe needed the idea to construct the net before it could become a profitable avenue of investment. Likewise, he needed the idea and the knowledge necessary to construct a boat before he undertook that project. If he had accumulated a large stockpile of savings but didn’t have an accompanying new idea, or didn’t think his idea was good enough to warrant investment in it over other potential projects, then the structure of production won’t be lengthened. Accumulation of savings alone is not enough to lengthen the structure of production if there is no accompanying idea for how the lengthening will be accomplished so as to increase output from a given quantity of inputs*.
So does this mean that if the central bank injects unbacked credit into a market that is already optimizing its structure of production given current technological and resource constraints, said market won’t invest the new credit? Of course not. They will invest the additional receipts not in lengthening the structure of production, but in increasing the quantity produced by investing it in the same proportions among the different stages of production.
The impact of my contention on the trade theory as a whole is minor. Whether malinvested resources are used to lengthen the structure of production or produce a greater quantity of output directly, the result is the same: too many resources are invested into a particular sector given society’s preferences. But I think this difference is important to realize, especially when trying to convert non-Austrians to your point of view because it can be an area of confusion.
Take the housing bubble. It’s not that the Fed’s credit expansion led entrepreneurs to lengthen the structure of housing production, i.e produce houses in a more ‘roundabout’ time-consuming method; it was simply that too many houses were built. Too many people became builders and realtors. The malinvestment that occurred was in overall quantity, not a flattening of the Hayekian triangle.
I should qualify that my analysis pertains to the time-structure of production of a particular industry or set of industries. In terms of the overall economy, the quantity increase I discussed would lengthen the structure of production insofar as it is averaged over all economic activity, assuming that house construction is a more lengthy process than whatever else the resources would be devoted to in the absence of the credit expansion. However, I don’t think this is the sense in which Hayek and Mises mean the structure of production is lengthened. I think they are referring to the actual lengthening of the structure of the specific industries into which the new credit flows.
*Hayek would disagree with me here. In Prices and Production he explicitly states that an increase in technological knowledge is not necessary for a lengthening of the structure of production, yet I don’t see how this could be true for over an extended period of time. Sure to the extent that the technological knowledge to expand the structure of production is already available, possibly because competitors have already implemented it, our producer wouldn’t need a “new” idea. But when we reach the point where every producer uses the available technology to optimize output, we must explain how artificial credit stimulation at this point can still distort the allocation of resources.